China exports yet more excess capacity to crippled West

By Ambrose Evans-Pritchard

July 10th, 2012

They keep on coming...

Very quickly – since the German constitutional court awaits this morning:

China’s trade surplus jumped 43pc to almost $32bn in June. Imports for domestic consumption fell sharply.

This is exactly the sort of development that I alluded to in yesterday’s blog, subject to all the usual health-warnings about a single month’s data.

It implies that China is no longer consuming enough of its own output. It is exporting excess manufacturing and industrial capacity – with an undervalued currency – into a world that is already grappling with a deep secular slump.

(China is not the worst or only offender in this respect. Germany’s current account surplus under the fixed D-Mark racket – the euro – is far higher as a share of GDP. But China is the world’s second largest economy, so it matters.)

It transmits a fresh deflationary impulse to a world already dangerously close to deflation. This is a greatly under-estimated risk.

It is an open question whether China can navigate its way calmly through this post-bubble downturn over coming months, but that is not really my point. Can a fragile world cope with the consequences?

Just to clarify a misunderstanding, I am not in the "China is doomed" camp at all.

(Nor am I in the "China will take over the world" camp. I am in between.)

The Chinese boom reminds me of the exuberant growth and excesses of the US in the Roaring Twenties.

The Great Depression that followed was a nasty shock – the inevitable unwinding of excess credit, compounded by Fed policy errors and the destructive effects of the post-WWI Gold Standard – but it did not prevent America ultimately taking its crown as the world’s dominant power.

My guess is that Chinese credit growth of almost 100pc of GDP over the five years from 2006-2011 (including off-books lending) has stored up a host of problems, and will be followed by a nastier hangover than widely supposed.

My guess too is that the Chinese authorities will handle/are handling the fall-out with greater skill than the hapless Fed in 1930-1931, or indeed the hapless Bank of Japan in the early 1990s. But whatever happens is but a hiccup in the longer flow of events.

China will surely reclaim it historic place as one of the world’s great powers, but somewhat restrained by its aging crisis and looming demographic crunch.

It is a Goldilocks evolution. Not too hot, not too cold.

On this at least I am a (naive?) optimist.